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Japan oil demand cut could be swift

The Asian nation’s consensus culture means renewable energy could very quickly take a substantial chunk out of conventional hydrocarbons requirements

The International Energy Agency’s November World Energy Outlook projects only a relatively minor difference of 54mn t oe in Japan’s 2040 oil demand between the country’s “stated policies” and “sustainable development” scenarios. But such a conservative projection for the latter may understate the impact of strengthening political and corporate will in Japan to turn away from fossil fuels.

The country’s culture places an overriding importance on consensus. This means that major policy shifts are usually slow to achieve. On the other hand, once an aim is defined, all stakeholders will work tirelessly and collegiately to achieve that goal.

Witness the country’s economic recovery after defeat in the Second World War, or the country’s adoption of nuclear power from the mid-1970s, when the oil price shock exposed the energy vulnerability of this import-dependent nation. By the time of the 2011 Fukushima nuclear disaster, Japan had become the world’s third largest generator of nuclear electricity. 

Growing commitment 

That single-minded process of adoption is likely to be repeated in renewable energy. 

The IEA, meanwhile, has “a long history of dramatically underestimating variable renewable energy (VRE) cost deflation, and hence installation growth,” and the agency’s estimate on the impact of Japan’s policy shift on oil demand is likely an underestimate, says Tim Buckley, director of energy finance studies, Australasia at thinktank the Institute for Energy Economics and Financial Analysis (Ieefa) in Sydney.

Japanese leaders have embraced offshore wind as a substantial potential solution

Japan’s political and corporate leadership effected a “strategic pivot” in late 2018 to treat Japan’s Paris agreement decarbonisation commitments more seriously, Buckley argues. The country had previously been an obstructionist force in global climate discussions, he says. Conglomerate Marubeni’s September announcement of its decision to reduce coal generation capacity and a Financial Times op-ed by Prime Minister Shinzo Abe in the same month about the need to address global warming are among the visible manifestations of the shift.

Many developers who did well in the early days of solar are now using their capital and expertise to take on new challenges, such as offshore wind and geothermal power, says Daniel Shulman, principal at consultancy Shulman Advisory in Tokyo.

The engagement with policy makers and regulators necessary to make renewable technologies economically viable has been a huge, involved effort, he argues. “Developers have become more sophisticated.” 

Obstacles remain 

Buckley identifies a number of major hurdles to accelerated growth that renewables in Japan will have to overcome. A significant increase in VRE will play havoc with the reliability of the country’s antiquated and fragmented grid system. Grid access for VRE is a “major impediment” and the political will to solve it has so far been absent.

Currently, there is also virtually no data transparency regarding grid conditions, so the utilities can be arbitrary about when they choose to make curtailment calls against renewable generators, says Shulman.

“Japan is far from immune to stranded asset risks” Buckley, Ieefa

Land availability and cost in a country which is about three-quarters mountainous is also a handicap, with Japan having installed negligible onshore wind generation since Fukushima. Shulman agrees that land constraints are an impediment, arguing that large-scale offshore wind installations will have to play a substantial role.

Japanese leaders have indeed embraced offshore wind as a substantial potential solution, given higher utilisation rates of about 50pc for offshore wind, versus 20-30pc for onshore wind and 10-15pc for solar, Buckley says. But, while agreeing with Shulman on the land use advantage, Buckley points to deep ocean waters and busy shipping lanes which mean that Japan will have to pioneer floating offshore wind–yet to be proven as commercially viable.

Buckley’s third barrier is the high cost of Japanese equipment and engineering, with the installation cost of wind and solar among the highest in the world. Japan also suffers from what he calls “very poor solar resource”like northern Germany, Japan’s radiation is half-to-a-third of that available in better locations such as India or northern Australia.

The obstacles, however, can be overcome. The Fukushima disaster—making any expansion of nuclear energy a non-starter in reality—and Japan’s lack of domestic hydrocarbons means there is no competing solution putting up a compelling case as an alternative to renewable energy expansion.

The re-use of land in Fukushima to generate wind and solar power is an example of its growing place in the national consciousness. The Japanese population is showing significant responsiveness to campaigns to improve efficiency and reduce energy usage, underlining its increasing environmentalism, says Shulman. 

Turning against coal 

Lobby group the Global Wind Energy Council in Singapore points to Japan as the only G7 country still planning for new coal-fired power stations. But Buckley argues that global capital is fleeing coal-fired power generation, and that “Japan is far from immune to stranded asset risks”.

The country has been investing in offshore wind in Taiwanthe first non-Chinese market in East Asia to move into the offshore space. This remains expensive, as a whole logistics supply chain needs to be established, and Taiwan’s first offshore wind project cost $180/MWh—about five times the price in Australia or India. Despite heavy commitments from Japanese investors, there probably will not be any material contribution from Taiwanese wind for the next five-to-seven years, Buckley says.

10pc – Japanese electricity demand drop in last decade

But by 2040, Ieefa expects offshore wind globally to be a third major VRE force alongside onshore wind and solar. Japan is now in a wind power race with China, Taiwan, South Korea, Vietnam and India, Buckley says.  As these nations embrace offshore wind, this will collectively drive down offshore wind costs and drive uptake, he argues.

Buckley expects a modest Japanese solar installation level of 2-4GW pa, driven mainly by residential, commercial and industrial rooftop installation. In a market where electricity demand has fallen by 10pc over the last decade, every 4GW of solar power means that 1GW of thermal power capacity can be closed. Once built, VRE has a zero marginal cost of production for the next 25 years, Buckley adds, while a 30pc increase in coal taxes in April and a 5pc rise in the price of carbon emission permits this year will also play a role in pricing coal-fired power out of the market.

Shulman points to recent extended power outages following typhoons in Chiba in the greater Tokyo area, which he describes as “unacceptable”, as a further trigger for change. A committee at the ministry of economy, trade and industry (Meti) has recommended gradual moves towards a framework allowing parts of the grid to be bought and operated by non-utility companies. This will allow municipalities and regional companies to coordinate in creating microgrids and start using grid-scale storage, he predicts.

Rivalry with South Korea, currently embroiled in a trade war with Japan, will also have a part to play. South Korea has also introduced a 60 GW VRE target. “It will not be lost on Japanese leaders that their industrial rival is stealing a march on them,” says Buckley.

Schulman sees a “strong likelihood” that the consensus dynamic will express itself in renewable energy.  And Buckley’s Japanese colleagues tell him that consensus-building talks on decarbonisation behind the scenes are being directed by Meti. Given the ministry’s influence, “that suggests momentum will continue to build”, he predicts. 

This consensus-driven system has its weaknesses. Once a path is set, the ship cannot easily change course. That is likely to be good news for renewable energy adoption, if not necessarily for future technologies that can deliver even more optimal solutions. It remains likely that the country’s switch to renewable sources will be pursued in a narrower but more single-minded way than standard economic models predict.

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